Question

(use Harvard style reference and citing to answer the following two questions )

1. How do commercial banks generate profit?

2. Explain why a dollar today is worth more than a dollar tomorrow.

Answer 1

Commercial banks generate profits by offering loans to the people at pre - decided rate of interest. They accepts deposit from people and use the same money to lend but the rate of interest they charge to borrowers is more than they offer to lenders. The margin between rate of interest is bank's profit.

Dollar today is worth more than dollar tomorrow if nominal interest earned on it is less than inflation rate which result in decrease in real interest rate which eventually result in fall in purchasing capacity.